Why Ireland Should Vote No To The Fiscal Compact

Those of you who have followed the developing Eurozone crisis have certainly heard of the fiscal compact, previously called fiscal treaty or fiscal union, that the powers that be within the EU has tried to set up to control the budgeting procedures within each country in the union.

Basically, the Eurozone, which currently is only a monetary union (meaning they have the same currency and central bank), will become a fiscal union as well. Countries will not be allowed to run deficits of more than 0.5 % of their GDP, unless these deficits are approved by the other countries. In effect, if you want to borrow money, you’ll have to ask France and Germany for permission. Also, no country will be allowed to have a debt higher than 60 % of their GDP. The idea is that through harmonizing tax rates and debt levels, we can avoid some countries being in a boom while others are in a bust, and we can avoid state bankruptcies that threaten to unravel the whole European project.

Ireland is now going to hold a referendum on whether or not to agree to this fiscal compact. The government did not initially want one, but the Irish constitution (which, by European standards, is a really good constitution) does not allow the government to give away this kind of power to a foreign entity without first holding a referendum about it. So now, in just about two months, the Irish will go to the polls to decide whether to sign up to this fiscal compact.

Does the fiscal compact sound good? After all, as conservatives, aren’t we against deficits? We certainly are. Yet, I firmly believe Ireland should reject the compact. Here is why:

1) Bond yields will go up. This is something a lot of people will dispute, but it’s quite well-known by now that having no independent monetary policy leads to discounted bond prices. Investors – all other things being equal of course – seem to simply prefer independent countries that retain as much power as possible over their economies. Now, given that investors have already shown their dislike of countries that give up their monetary policy independence – imagine what will happen with the bond yields of countries that give up their independent fiscal policies as well. Yes, that’s right, yields will go up even more. Not the best thing for a country that is trying to return to the markets.

2) Germany and France – not reliable as economic experts. I wrote about this in my last post on this subject; how Germany is the real economic basketcase in Europe. Germany’s growth was stagnant for half a decade at the start of the 2000’s, which coincidentally was the same time as the Irish economy was booming. This is why the ECB lowered interest rates, to boost the German economy while overheating the Irish one. The Germans basically think the Irish have themselves to blame; had they only raised taxes to compensate for the low interest rates, everything would have worked out fine. Of course, the Germans themselves could have lowered their own taxes to boost their economy instead of just injecting cheap credit, but I guess that was just too much work for them.

To give these countries – who are obviously only interested in their own well-being, not in that of Europe’s – even more influence cannot be justified. If they didn’t care about you then, why would they care about you now? Imagine the mess Germany could cause with the power to reign in other countries budgets and “harmonise” (and that means raise) the tax rates. They’re no economic experts, the Germans and the French. And they don’t care about you at all.

3) No more bailouts? They’re bluffing. Germany and France, ie the powers that be, have threatened Ireland and the fellow PIIGS countries by making it clear that any country that does not sign up for the compact won’t ever receive any assistance from the rest of them again. In other words: No more bailouts. They’re bluffing. Angela Merkel wants the Irish (and the Greek, and the Spanish etc) to believe that they bailed them out because of old friendship’s sake. They didn’t. The reason was purely financial – German banks happen to sit on billions worth of Irish bonds, and it just seemed cheaper to bail out Ireland than to bail out the German banks (which is what they would have had to do had Ireland defaulted). This financial incentive is still around, and so the bailouts will still be around if Ireland were to ever need another one. I’m not a big fan of bailouts, but by all means don’t vote Yes because you’re afraid Ireland won’t receive any more bailouts if you don’t. Now, if Ireland does vote No and does end up needing another bailout, the next one will probably not be called a bailout as that would mean that Germany and France would lose face, but they’ll save you still, one way or the other.

4) Don’t throw away independence – you never know when you might need it. There is no exit from the fiscal compact. What Ireland has done so far is bad: Indebted itself for generations to come. Buying stuff on credit and sending the bill to your grandkids is bad enough, but taking away your grandkids independence? That ought to make Ireland a good candidate for the “Worst grandparent of the century” award. With no monetary nor fiscal policy, and most other political areas already regulated by the European Union, Ireland (and the others) will certainly have taken the final step towards becoming a German vassal state.

5) The basic problem is not resolved. The reason why the Eurozone countries are not in sync, business cycle-wise, is far more complicated than just the fact that some countries like to put on more debt than others. All this compact does is stopping countries from running large deficits and having a national debt over 60 % of GDP. It does not, however, stop countries from subsidizing certain industries (like housing, in Ireland’s example). If an industry is going through a bubble, caused for instance by cheap credit, and a country decides to subsidize it instead of trying to deflate the bubble, then that country is going to be hit so much harder once the bubble bursts. So just because you have debt, tax and other forms of harmonisation, does not mean you’ll end up with a harmonised business cycle. In addition to that problem, the countries within the Eurozone are quite different: Ireland is high-tech, Spain and Greece relies to a higher extent on agriculture and tourism. A bad tourism season together with a tornado, and Greece will be in recession – and this could happen at the same time as the German economy is booming. Because of this, the Eurozone with its current set of members is an unworkable construction.

6) Politics. It’s not that the fiscal compact is such a bad idea in theory – having a debt below 60 % of GDP and a deficit below half a % of GDP is in general two pretty good ideas. It’s politics that makes the execution of it harder than it is on paper. You see, these rules are very negotiable – if you can convince the others that they should allow you to make an exception and have a higher deficit than you’re normally allowed to, then you can get away with it. So how to convince everyone else? Why, promise them a counter-favor of course. “I’ll vote not to punish you for your deficit if you vote for not punishing me for mine”. Political vote-trading is hardly new and in the EU, it has made virtually every inconvenient rule ineffective. Remember, there already is a rule saying no country is allowed to run more than a 3 % deficit – how well has that worked out? Germany and France were the first countries to break that rule!

On the same note, since this is politics we’re talking about, expect more regulations under way. The fiscal compact is not enough; in the end, the EU will need to have the power to actually change a country’s budget (decide what it should spend money on etc) in order to accomplish what it’s trying to accomplish – a harmonised Eurozone (and even then it’s not certain it’s possible).

Summary

For me as a conservative, deciding not to sup

port this compact was not an easy thing to do. After all, I’m absolutely against deficit spending. But one thing I find even more scary than deficit spending is the idea of a European superstate; a United States of Europe.

While the Irish cannot prevent the compact from coming into effect, it can choose not to join it and send a message to the European elite, and that message is a message they need to hear: We don’t want your superstate. We didn’t fight off the British just to become a Vassal state under Germany.

The reason the Eurozone is not working is not because the politicians in the European parliament and commission don’t have enough power – although like all politicians, that’s the case they make whenever something goes bad. “Please promote us and give us more responsibility so we can fix the things we’ve screwed up so far” – can you see anyone successfully making that case in a private company? Yet it happens all the time in the political world.

We still don’t have a date for the referendum. But whenever it happens (and it will be soon), I urge all my Irish friends to vote NO to the Fiscal compact.

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About John Gustavsson

John Gustavsson is our European and Economic analyst. John holds a Master of Science in Behavioural Economics from the University of Nottingham, and a BA (Hons) degree in Finance & Economics from NUI Maynooth. He was born in Sweden in 1991 and grew up in Örnsköldsvik, a small town on the north east coast - one of the most left-winged areas in one of the most left-winged countries in the world. Despite (or maybe because of) having grown up in this environment, John is a fiscal, social and foreign policy conservative. He became interested in politics at the young age of 10, and the first American election he followed was the 2004 Presidential race. Here at Caffeinated Thoughts, John provides commentary on topics ranging from the Eurozone crisis and the future of the global economy to how behavioural economics can be used to analyze fiscal policy.

Comments

Wow, what a weak analysis, but then again, the author seems to be an undergrad student, so there’s hope he will eventually catch up

1) You mention that the first countries to break the 3% deficit rules were Germany and France. I congratulate you for making this observation since that is actually correct. However, what you obviously do not want to see is that they were able to break this rule because the rules were not enforced, i.e. they managed to speak themselves out of any consequences. The fiscal pact that you want to reject here, however, will make it impossible to get away that easily. Why you use this example to argue AGAINST the fiscal pact remains unclear…

2) You state that both France and Germany only care for themselves. Yes, like all countries in the world, these countries first of all care for themselves. One can only speculate why you decided to demonize these two countries. Was it to create a negative mood against them? Besides, you forgot to mention that these two countries have been net contributors to the European budget since the founding of the EC. Germany, in particular, has shown the tendency to pay up to solve intra-
european conflicts. Not very anti european, is it?

3) You mention that Ireland will have to ask France and Germany for permission if they want to borrow money. Sadly enough, you once again decided to demonize two countries, namely Germany and France. With the fiscal treaty in place, ALL countries that signed the contract will have to report to the European Commission (not to the German and/or French governments).
Germany and France will have to do the same, i.e. they give up their financial independence as well. Their people are not happy with it, but so far, no better solution has been presented if we want to keep the Euro as our currency.

4) You question that the French and German governments are bluffing, i.e. that they will not stop bailing out. You must have missed the news that Merkel already is struggling to get the required mayority in the German Parliament to increase the bailout for Greece. Even within her own government, you can hear arguments that it’s cheaper to bail out the banks once rather than paying up for the PIIGS forever.

Do you have a master’s degree/PhD in economics? A first class honors? Otherwise, I have to ask you sincerely to please shut up about my academic qualifications.

1) The rules were not enforced, that’s correct. But why were they not enforced? Because there is no country in the EU big enough to enforce the rules when countries as big as Germany and France break them. That hasn’t changed. You can still receive exemptions from the rules under the fiscal compact. Do you seriously believe France and Germany can’t bully the other countries into giving them exemptions?

2) Of course every country cares for itself first and foremost. That’s why I’m against European unity and co-operation; Germany only cares about Germany, hence Germany should only be allowed to influence Germany. Sweden only cares about Sweden, hence Sweden should only be allowed to influence Sweden. This European project is madness and it has to end.

3) In practice, these are by far the most influential countries in the EU and there is no denying it. Why do you think ECB is busy fighting non-existant inflation? Because the Germans are scared to death of inflation because of things that happened 80 years ago. Please don’t pretend like a small country like Luxembourg or Malta has as much influence as Germany or France.

4) My point is that the Fiscal compact has no effect on whether or not Ireland will get another bailout. If the political will to help Ireland runs out, if it becomes too costly, then the bailout money will stop coming whether or not you agree to the Compact. Ireland has already agreed to a deficit reduction plan, that’s more than enough.

As a matter of fact, i do have an advanced degree in economics. But to be honest, I don’t think it’s required to see through your flawed arguments.

1) Fair enough, you don’t need to be a fan of the European Union. But you have to realise that the EU exists and that its member states understand that it gives them a stronger influence on a world stage than each individual country would have by itself. No country in the world would care about Swedish, French or German industrial standards or regulations.
European standards, however, are even adopted in mighty China. What this means should be clear, right?
Of course, Germany and France have a stronger influence on EU matters than Luxembourg and Malta. After all, these are the most populated countries in the EU and from my democratic understanding, the words of many should outweight the words of few. Another question is whether the respresentation of these countries in Europe really repesents the countries’ population size. A German Member of European Parliament represents 859,000 people, while a Maltese MEP represents 67,000 people. And yet, both have only one vote in the parliament. In the European Council, each member state has one vote, no matter how many people it stands for. Is that an advantage for Malta or for Germany? Simple mathematics…
BTW, without the EU, Germany’s influence on Europe would not disappear, as you seem to believe. A mature economics genius like yourself surely remembers the influence that the German Bundesbank had on other countries’ interest rates. Whenever they changed their own rates, other central banks had no choice but to match these rates. Or have a look at China’s influence over Taiwan, USA’s over Mexico, etc. So maybe it’s time to wake up and to realise that the EU is the best
platform for small countries to defend their own interests against the larger countries. For further reading, I recommend you have a look at some of the lawsuits of the European Commission against Germany and France (and all other member states, but you seem to prefer pointing fingers at these two countries, so let’s keep that tradition for now). Also, what would the Luxembourgish banking sector look like without the open market of the EU? How many American IT companies would have settled in Ireland if the country stayed outside the EU? I just don’t see how only the large countries benefit from EU membership…

2) The Fiscal Compact explicity states that only those countries can apply for bailout money from the European Stability Mechanism that signed the agreement. This means that access to this money is guaranteed by a contract, while countries outside of this contract have to hope for good will of foreign governments once the markets don’t trust them any longer.
However, once this agreement is in place, there won’t be any political will to protect those countries that didn’t sign, since this would question the very existence of the contract. As a consequence, they would be left to the markets. Sorry, but if that’s the advise you’re giving to your friends, I feel sorry for them.

3) Again, once the EU member states give themselves rules, it is the EU Commission’s job to guarantee that all members comply. Germany and France can then bully as much as they like, after signing this contract they have to fulfil it. As
mentioned before, I recommend you read a bit about lawsuits of the Commission vs. France or Germany to see that they are really doing their job. Sometimes, things take longer, such as France’s strong subsidies of their industry, but they happen eventually.

1 I just don’t see how only the large countries benefit from EU membership… They
gain power and influence over foreign factors of production which is the point of statecraft and Germany achieves her
world war one aims, the mitteleuropa plan is achieved 100 years behind
schedule

2 It would be good for Ireland to face the markets and bite the bullet ie default and shed herself of the burden of servicing the gambling debts of private and foreign speculators and banks.

3 The EU commission is a Politburo type council of unelcted central planners who serve their own interests first that is to say the expansion and consolidation of their own power. The Iron law of oligarchy is alive and well in the 21st century.

1) Yeah, the German government seems to do a pretty bad job achieving this ‘goal’ though, considering that they do not intervene when major German companies are taken over by foreign companies, hence allowing foreign access to German production factors. I guess you prefer staying in your conspiracy based comfort zone where Elvis Presley and Marilyn Monroe enjoy their daily cup of tea with Nessie and Michael Jackson, but for any other open minded reader, I recommend reading the following articles:

Some examples reported in Anglo-Saxon media (in case you reject any German sources for whatever suspicious reasons):
Takeover of Germany’s biggest construction company by a Spanish company:http://www.economist.com/node/17361592
“Angela Merkel, Germany’s chancellor, and her coalition government have been lukewarm, arguing that corporate Germany should take care of itself.”

2) When saying that the EU commission only serve their own interests, I would appreciate if you could elaborate what these interests are. I guess in your world, their interest is to serve their German masters? In that context, I then fail to understand why the German government occationally has to remind EU officials that German is one of the Commission’s three working languages. Further, looking at Wikipedia (http://en.wikipedia.org/wiki/European_Civil_Service), I don’t see anything about today’s European Civil Service being dominated by German nationals. Reality weirdly seems to contradict your claim, why is that?